Daily Musings and Music of a Euromarket Professional

Uncomfortable as it may be, being aware of sitting on a time bomb shouldn't keep us from being able to laugh about it - and to listen to some music!

Daily musings of a euromarket professional

Thursday 6 September 2012

06 Sep 2012 – “ Shock Me " ( KISS, 1977)

06 Sep 2012 – “ Shock Me " ( KISS, 1977)

Aaah… It has finally arrived: the day of Great Expectations! US flat Wednesday close. Asia flat plus close. Europe flat to positive open ahead of the afternoon press conference from Mighty Draghi. Most expectations probably set after the last days of targeted leaks, although what is really expected, what is already priced in and what the reaction will be remains an unknown.
En attendant Mario”, some more ROn torsion in EGBs with Bunds off by 3 basis points in 10s and Spain tighter by 6. German 2 YRS trading above 0% for the first time since early July and even, believe it or not,  the CHF giving back 4 full pips to trade 1.205. Basking in serious Risk On… European equities up 0.25%, mainly to hark back to levels before yesterday’s choppy closing hour.
On the commodity side, we notice that Gold is back above the 1700-mark (Distrusting both EUR solutions and the US QE cum Fiscal Cliff?).

Data front light and subordinated to the ECB announcements anyway. French Q2 unemployment at 10.2%, a level last seen in Q4/1999.
Swedish quarter point rate cut to 1.25% (slowing data stream lately) good for an additional 0.5% in European equities. Plus up to another quarter on stops.

Spanish auction results showed a total of EUR 3.5bn (so no massive over-allotment, as often seen this year when bids were plenty), split into EUR 0.7bn 2014 at 2.798% (versus COB level of 2.96%), EUR 1.4bn 2015 at 3.676% (COB 3.90%) and EUR 1.4bn 2016 at 4.603% (COB 4.85%). So well overbid on a priced basis (compared to COB) but with bid to covers ranging from 2 to 1.8, much lower (of course, given absolute levels reached by now) than past auctions in the 2.5/3 range.
Tails remain huge with 23 cts in 2s (15bp), 26 cts in 3s (10bp) and a massive 53 cts in 4s (9bp), showing that one could drive a truck between average and cut-off bids. Explains why the Tesoro didn’t sell much more either.
In the end, it’s needless to point out that today’s results were far better than at the last auction that showed 4.79%, 5.20% and 6.06% for similar maturities, “Believe me, it will be enough” having passed since. So the question is now were the “right” spread might be for the ECB to act (if demanded). Auction passed, thumb sideways.
Officially, the Spanish Treasury has now raised 76.8% of its targeted bond issuance (without everyone else’s contingent funding) needs) and is in “comfortable” position. Hmmm… Well, if that doesn’t bode for an extension of the game of chicken with potential bail-out creditors.
Mid-market levels of the auctioned bond in Spain hurting within one hour:
2 YRS 3.09% (2.80% auction 2.96% COB), 3 YRS 3.88% (3.68% auction, 3.90% COB) and 4 YRS 4.82% (4.60% auction, 4.85% COB). Being a Spanish primary dealer is really a Sancho Panza kind of job…

French auction results published on the heels with about the targeted EUR 8bn sold with EUR 1.5bn in 5 YRS Oct 2017 at 1.05% (COB was 1.05%. Sorry, had mistakenly mentioned Apr 2017 COB level yesterday), EUR 3bn 10s at record low auction level of 2.21% (COB 2.23%, last 2.53% in July) and EUR 3.45bn new 15 YRS at 2.85% (COB 2.86%). So all bids in line with closing levels. No discount despite ROn morning or supply.
Then again, French 10s (despite the record low auction level) at the highest since end of July, having touched 2% mid July, as well as early and end of August. Intermediate high in-between had been 2.30% on 25 Jul. Relatively speaking an opportunity.

Further macro data: EZ Q2 preliminary GDP confirmed as foreseen at -0.2% QoQ. A tick weaker on a YoY basis at -0.5%. German Factory orders not that bad, after all, with a 0.5% MoM rise in July (fcst +0.3%) and prior data revised up one tick to -1.6%.  Still, it remains a 4.5% drop on a YoY basis (after revised -7.6%). Probably mirrors (more recent) PMI data showing some bottoming out, that shouldn’t mask the fact that we remain in serious contraction territory.
Greek June unemployment at record 24.4% (was 17.2% in 2011, 12.4% in 2010 and 9.3% in 2009. All time low was during Summer 2008 at 7.3%).

Settling in post-auction / pre-ECB modus with most EGBs 3-6 wider in 10s (but France trading tighter after a comfortable auction). Italian 10s keeping the 7 tighter reached earlier, just over 5.50%, and Spain the 13 bp likewise reached earlier to 6.25%.
Note that both the Italian and Spanish short end rapidly traded on the heavier side, despite (because) of a price-wise overbid auction (see above), leading to 2-10 curves flattening by roughly 15 bp on the day. Spanish 2-10s down to 318 from Monday’s 355 high. Periphery short end treading water with so much ECB support already priced-in and now in need for confirmation.

13 CET levels
10 YRS: Germany 1,50% (+2); Swaps 1,81% (+5); France 2,21% (-2); EFSF 2,47% (+3); Italy 5,51% (-8); Spain 6,19% (-19).
2 YRS Germany 0,007% (+2,2). 5 YRS OBLs 0,41% (+2).
Spanish 2s at 3,11% (+8). Spanish 2-10s 308bp (-27). Italian 2-10s 297bp (-21).
Spanish auctioned bonds 3.02%, 3.84% and 4.80% (8 bp off the post-auction highs of 3.10%, 3.93% and 4.89%). Choppy.
Stoxx Futures 2470 (+1,2%). Credit Main139 (-1); Financials 229 (-4). SovX 216 (-3). Cross at 556 (-2).
EUR 1,262. Oil 96,5/114,0 (WTI/Brent). Gold 1710.
Bank of England unchanged at 0.5%.

Probably barely noticed (as minutes before the rate announcement) and unnecessary fanning of convertibility risk discussions from opposition leader in Spain commenting that yields would be lower, if Spain was outside the EUR – but that the EUR is good for Spain. Can certainly only boomerang, if back in charge of affairs one day.

And unchanged ECB rates, that is ALL rates (my call)… So Refi 0.75% and deposits NOT going negative.
Triggering, hum, no immediate reaction whatsoever… Plus, 1 basis point in German 2s and 5s, if you need a reaction. 10 pips in EUR. Probably awaiting goodies at the press conference.
15 minutes later, still no reaction, outside EUR up to 1.264 and equities up 0.3%...Spanish 10s squeezed down 3.
Add another 15 minutes of mulling, Spanish bonds tighter by another 5 on screens, 10 YRS Bunds add one bp and the EUR is back to 1.263. Everything else ghostly static. If you shake all contributing cells one by one, Gold back to 1705 from 1712 spike. Freeze frame, but for Spain ripping tighter.

US figures: ADP Employment widely beating fcst +143 after 163k with +201k after 173k. ;Claims better, to, at +365 (fcst +370 (from 374k, revised to 377k), although Continuous Claims rose to 3322k (fcst 3315k after revised higher 3328k).
Non Manu ISM beating estimates at 53.7 (fcst 52.5 after 52.6). All is good!

ECB Conf starting with pointing to separate press releases on OMT etc. before continuing to point out to a dire economic outlook with further lowered growth projections (now mid -0.4%, down a tick, from prior -0.5% for 2012 and down to +0.5% from 1% for 2013), but higher inflation (put on energy cost rises) now +2.5% for 2012 and +1.7% in 2013. Low M3 and loan growth (…). Aaaand, then, usual call for fiscal reasonability and structural reforms. Before outlining the (by now widely leaked) OMT (link):
1- Conditionality, 2- Full or precautionary intervention, 3 -Backed by ESM/ESFS primary buying, 4- Backed by IMF monitoring support , 5- Will stop if conditions not met (all as leaked).
Only for future cases, unless bailed-out countries can access markets (Ireland, maybe Portugal).
1-3 YRS, unlimited amounts
Pari-passu to other holders
Sterilized amounts. Old SMP is dead, long live the OMT.
Break-down and average maturities will be published, which will show who’s been supported (so a far cry from hopes of unlimited and secretive ECB buying until things are seen as being put to the “right” level). So, if there’s a fear of stigma, that won’t help either. Any request for help will very much be made public and, if not accountable, it should clearly appear in the ECB books.
On collateral: No minimum credit threshold on sovereigns is no huge step forward, as rating dependent haircuts will remain. Expansion to non-EUR security, of course, a plus for banks and their USD funding (see Financial Credits performance today).

At 15 CET, half an hour into the press conference, the only thing really changing was long end Spanish 10s. As side-show, Portuguese bonds tightening by up to 25 bp, as probably eligible to some support. EUR back through 1.26.

Not sure much came out of the press conference per se. Obviously dissenting German view. So, it’s up to the countries to ask for intervention. Oh, isn’t that what hasn’t happen so far? And first comments by Rajoy, after meeting with Merkel, was that he hadn’t read the full announcement yet. Given the publicity need for intervention, and the fear of stigma, not sure this will happen soon. And there is risk of unbalancing the funding structure, if sovereigns were to hit the “short only’ button.

End of conference coinciding with huge short squeeze in equities with EStoxx up 2%, as the Dow opened up 1%, hitting a 5-m high at 2500. Eventually, Spanish 10s went down to just over 6%, finally triggering the short end to move, too, giving finally an opportunity to hold the Spanish auction supply at no costs (2.83%, 3.63%, 4.56%)

Honestly I can’t make much out of the whole thing. So, ok, yes, there’s a huge conditional bazooka out there, but who wants to really use it? The IMF involvement means further pain, especially on pensions (a no-go for the moment in Spain). Even the Bankia recap has been done off programme so far, in order to keep things under Spanish control. Yes, remember, the bank-bailout MoU. Difficult. Good back-stop, though. But if triggered, and given the transparency, the such bailed-out will lose sovereignty to the creditor nations (and especially the latter’s public opinions), as everyone will know what is due etc. Lack of seniority is likewise tricky, if the thing was to blow up, as we’re not talking about shady Target 2 imbalances anymore, but about very accountable bills. And even then, if the whole funding is skewed to the shorter end, who will want to bet and go beyond the roll-over dates a couple of years from now??? Seems like a huge defibrilattor. Good to have, but beware of not shocking the patient too much.
Ok, good Periphery performance and huge equity surge, but the sell-off in Core EGBs seems limited for the moment, given the relief mood. Have seen harsher reactions. Oh, and the short end of the Periphery only had a limited way down from here (albeit a lot had been discounted). Next hick-up, if curves steepen back from here, we’ll have Italy back to 6 and Spain to 7%. On the other hand, I do see the case for Ireland and Portugal to push forward, issue some bonds and ask for support. Hey, a huge opportunity to bring down costs to a decent level. No stigma attached, as beyond that anyway. Buying Portugal 2s and 3s at 4.70% and 10s at 8.70% might be worth a thought.
I’m puzzled.

Final comment of the day by the Bundesbank stating that it really, really, really doesn’t like the whole thing an obvious reminder of further implementation risks. Shock Me!

Bunds closed at 1,57% (+9), OBLs at 0,48% (+9) and BKOs 0,032% (+4,7).
Spanish 2s closed at 2,87% (-16) and 10 YRS BONOs at 5,99% (-39). Spanish 2-10s 312bp (-23). Italian 2-10s 312bp (-6).
Auctioned BONOs at 2.83%, 3.60% and 4.48% (versus auction at 2.80%, 3.68% and 4.60%), so worth the trouble. Spain closing symbolically below 6%, the lows seen in May / June. Seems a life time away, but isn’t after all.
EStoxx up nearly 3.5%. Credit massively tighter (Main 5.7%, Financials nearly 7%). Shock Me!

New Issues totally on hold.

Closing levels:
New Sep 2022 as German ref (Jul 2022 +4)
10 YRS Yields: Germany 1,57% (+9); Luxembourg 1,67% (+6); Finland 1,79% (+5); Swaps 1,84% (+8); Netherlands 1,90% (+8); EU 1,99% (+8), Austria 2,09% (+5); EIB 2,24% (+8); France 2,25% (+2); EFSF 2,51% (+7); Belgium 2,68% (+3); Italy 5,37% (-22); Spain 5,99% (-39).
Note the huge Portugal performance with 3-10 YRS tighter by 50 to 70 bp, 5 YRS back in the 6.40s and 10 YRS well inside 9%.

10 YRS Spreads: Luxembourg 10bp (-3); Finland 22bp (-4); Swaps 27bp (-1); Netherlands 33bp (-1); EU 42bp (-1); Austria 52bp (-4); EIB 67bp (-1); France 68bp (-7); EFSF 94bp (-2); Belgium 111bp (-6); Italy 380bp (-31); Spain 442bp (-48).

EUR swap curve 2-5 YRS 51bp (+6,0); 5-10 YRS 81bp (+1,0) 10-30 YRS 54bp (+1,0).
2 YRS German BKOs closed 0,032% (+4,7) and 5 YRS OBLs 0,48% (+9).

Main at 132 from 140 (5,7% tighter); Financials at 217 after 233 (6,9% tighter). SovX at 210 from 219. Cross at 537 from 558.
Stoxx Futures at 2524 / +3,4% (from 2441) with S&P minis at 1427 (+1,6% from 1404, at European close).
VIX index at 16,2 after 17,6 yesterday same time.

Oil 97,0/114,6 (WTI/Brent) from 94,9/113,6 (+2,2%/+0,9%). Gold at 1706 after 1694 (+0,7%). Copper at 353 from 353 (+0,0%). CRB at EU COB 310,0 from 308,0 (+0,6%). More sedated world.
Baltic Dry on steady slide, now at 675 from 684. Another 4.2% until hitting the Feb low at 647. 

EUR 1,263 from 1,261

ECB deposits at EUR 347bn after EUR 342bn.

Greek bonds guesstimates: Down 25 bp with the overall relief with 2023s at 21.50% and 2042s at 18.25%.

All levels COB 17:30 CET


Spain: Fri Ind Output fcst -5.2% Jul after -6.3% YoY
US: Thu Friday NFP fcst +125k (after 163k), Unemployment fcst unch 8.3%

Click link on title or below for today’s musical support:
KISS rules!
Shock Me, make me feel better!

Was initially going for “Great Expectations”, as these are still around, but equity reaction shows more of a shock for some parts of the market

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